SUPREME COURT OF INDIA
Appellant was an advertising agency, engaged in creating original concepts and designing advertising material filed its returns both under Finance Act, 1994 and Karnataka Value Added Tax Act, 2003. Assessing Authority completed assessment by excluding certain items of exempted turnover which included service charges, design and art work charges collected by appellant in which no transfer of property in goods was involved. Subsequently, criminal proceedings were initiated against appellant and Tribunal held that sale of printed material with a background of providing concept was an indivisible activity liable to tax as a whole. On appeal, High Court upheld order passed by Tribunal – the exclusive payment of service tax and VAT should be held to be applicable having regard to respective parameters of service tax and sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract - therefore, sales tax would not be payable on value of entire contract irrespective of element of service provided . Assessing authority was correct in law approach and, therefore, impugned judgment was to be set aside and appeal was to be allowed.
Imagic Creative (P.) Ltd. v Commissioner of Commercial Taxes
The appellant on the basis of purchase order filed its returns both under the Finance Act, 1994 and the Karnataka Value Added Tax Act, 2003 for the assessment year 2003-04. The assessing authority completed the assessment by excluding certain items of exempted turnover which included the service charges, design and art work charges collected by the appellant in which no transfer of property in goods was involved. After passing of said assessment order, a raid was conducted and a criminal proceeding was initiated against the appellant and an order was passed by the Tribunal holding that the sale of printed material with a background of providing the concept was an indivisible activity liable to tax at 4 % as a whole. An appeal preferred there against by the appellant in terms of section 24(1) of the Kerala Sales Tax Act was dismissed by the division bench of the High Court.
On appeal to the Supreme Court, the appellant submitted that the High Court has passed the impugned judgment in so far as in the event the contract was held to be an indivisible one, the service element thereof being subject to service tax, no sales tax could have been levied on the incidental transfer of goods unless such transfer falls within the scope and ambit of one of the provisions contained in sub-clauses (a) to (f) of clause (29A) of Article 366. The respondent on the other hand submitted that an entire transaction was a composite one in as much as all what transferred was the documents containing not only the value of the goods but also the soft skill involved therein; and taxable value of goods was what the buyer was buying and in view of the fact that when by some creativity the value of the goods was enhanced, the entire value had rightly been held to be taxable.
The appellant, in its returns, made three categorical divisions in regard to its tax liabilities viz,
(1) the amount of service tax on the specific design and production;
(2) the amount of Kerala Sales Tax on the specified item on the first sale, and
(3) when certain items were outsourced, the tax payable on resale of the said goods in terms of section 6(4) of the Kerala Sales Tax Act. [Para 13]
The Tribunal as also the High Court opined that the contract was an indivisible one. [Para 14]
The Parliament amended the Constitution to insert clause 29-A in Article 366 of the Constitution, by reason of which a legal fiction was created so as to make the supply of goods involved in a works contract, subject to tax. A transaction of the instant description was not contemplated. [Paras 15 and 16]
The appellant admittedly was a service provider. When it provided for service, it was assessable to a tax known as service tax. Such tax was leviable by reason of a Parliamentary statute. In the matter of interpretation of a taxing statute, as also other statutes where the applicability of Article 246 of the Constitution read with seventh schedule thereof is in question, the Court may have to take recourse to various theories including ‘aspect theory’. [Para 24]
If the submission of the respondent was accepted in its entirety, whereas on the one hand, the Central Government would be deprived of obtaining any tax whatsoever under the Finance Act, it was possible to arrive at a conclusion that no tax at all would be payable as the tax had been held to be an indivisible one. A distinction must be borne in mind between an indivisible contract and a composite contract. If in a contract, an element to provide service is contained, the purport and object for which the Constitution had to be amended and clause 29A had to be inserted in Article 366, must be kept in mind. [Para 25]
A legal fiction is created by reason of the said provision. Such a legal fiction, as is well known, should be applied only to the extent for which it was enacted. It, although must be given its full effect but the same would not mean that it should be applied beyond a point which was not contemplated by the legislature or which would lead to an anomaly or absurdity. [Para 26]
The Court, while interpreting a statute, must bear in mind that the legislature was supposed to know law and the legislation enacted is a reasonable one. The Court must also bear in mind that where the application of a Parliamentary and a Legislative Act comes up for consideration ; endeavours shall be made to see that provisions of both the acts are made applicable. [Para 27]
Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. It was, therefore, difficult to hold that in a case of instant nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided. The approach of the Assessing Authority, thus, appeared to be correct. [Para 28]
Consequently, the impugned judgment could not be sustained and the same was to be set aside accordingly and the appeal was to be allowed. [Para 35]